Capital Structure and International Debt Shifting

Harry Huizinga, Luc Laeven and Gaëtan Nicodème

No 07-015.RS, Working Papers CEB from ULB -- Universite Libre de Bruxelles

Abstract: This paper presents a model of a multinational firm’s optimal debt policy that incorporates international taxation factors. The model yields the prediction that a multinational firm’s indebtedness in a country depends on a weighted average of national tax rates and differences between national and foreign tax rates. These differences matter as multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested using a novel firm-level dataset for European multinationals and their subsidiaries, combined with newly collected data on the international tax treatment of dividend and interest streams. Our empirical results show that a foreign subsidiary’s capital structure reflects local corporate tax rates as well as tax rate differences vis-à-vis the parent firm and other foreign subsidiaries, although the overall economic effect of taxes on leverage appears to be small. Ignoring the international debt shifting arising from differences in national tax rates woudunderstate the impact of national taxes on debt policies by about 25%.

Keywords: corporate taxation; financial structure; debt shifting (search for similar items in EconPapers)
JEL-codes: F23 G32 H25 (search for similar items in EconPapers)
Pages: 65 p.
Date: 2007
New Economics Papers: this item is included in nep-pbe
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Citations: View citations in EconPapers (72)

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Related works:
Journal Article: Capital structure and international debt shifting (2008)
Working Paper: Capital Structure and International Debt Shifting (2007)
Working Paper: Capital Structure and International Debt Shifting (2006)
Working Paper: Capital structure and international debt shifting (2006)
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